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NAM: Monday Economic Report from Chad Moutray

Associated Industries of Missouri is the sole official designated partner of the National Association of Manufacturers in Missouri.

MONDAY ECONOMIC REPORT June 27, 2016

The vote for the United Kingdom to leave the European Union—the so-called “Brexit”—dominated headlines on Friday. For many, this was a surprising result, with many analysts expecting pragmatism to win at the end of the day. For their part, financial markets had already priced-in keeping the United Kingdom in the Eurozone, with the British pound soaring early last week to its highest point year-to-date and the Dow Jones Industrial Average crossing 18,000 for the first time since April 27. With Brexit succeeding instead, the markets gave back some of those equity gains, with the largest declines seen in the United Kingdom itself—at least for now. For instance, one British pound exchanged for $1.3667 on June 22, and it closed at $1.3660 on June 24, falling to a level not seen since 1985. For more on the Brexit decision from an economic perspective, click here, and for an analysis of how it will impact trade policy, click here.

The British vote was also on the minds of monetary policymakers at the last Federal Open Market Committee (FOMC) meeting. Federal Reserve Chair Janet Yellen said that it was one of the factors contributing to the decision not to raise short-term rates, with weak jobs numbers also a notable factor. In her testimony to Congress last week, she cited the soft labor market and indicated that “our cautious approach to adjusting monetary policy remains appropriate.” While the FOMC could hike the federal funds rate at its upcoming July 26–27 meeting, especially if employment numbers rebound in the June data, all eyes will likely begin shifting to the September 20–21 meeting, which might be more likely. Of course, the Federal Reserve remains data-dependent, making any move this year contingent on better economic conditions in the United States and abroad. This is particularly true in light of Thursday’s vote in the United Kingdom.

On Thursday, coincidently the day of the “Brexit” vote, Markit reported that Eurozone manufacturing activity rose to its highest level so far in 2016. Much of this improvement came from stronger demand and production in Germany, which expanded at its fastest rate since February 2014. Yet, there were also signs that “Brexit” uncertainties and global headwinds had weighed on sentiment. Along those lines, the Markit Flash Eurozone Composite PMI, which includes services, declined to its lowest point since January 2015. In addition, growth in Europe has not been uniform, with France contracting for the fourth straight month.

Closer to home, the Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) increased from 50.7 in May, its lowest level since September 2009, to 51.4 in June. Output and exports rebounded for the month despite a still strong U.S. dollar and continuing economic challenges abroad. At the same time, new orders and employment picked up slightly. Data from the Kansas City Federal Reserve Bank were also encouraging, with manufacturing activity expanding slightly for the first time since January 2015. New orders and production accelerated strongly, even as hiring and exports continued to reflect lingering challenges. In the report, it was also clear that respondents remained quite cautious—but positive—in their outlook.

In contrast to those releases, new durable goods orders decreased 2.2 percent in May, largely from weaker transportation equipment sales. Excluding transportation, new durable goods orders were off 0.3 percent in May and were down 0.4 percent over the past 12 months. Moreover, recent declines in manufacturing production and other indicators contributed to weaknesses in the two measures tracking the current health of the U.S. economy—the Chicago Federal Reserve Bank’s National Activity Index and the Conference Board’s Leading Economic Index. Consumer sentiment, according to the University of Michigan and Thomson Reuters, also ebbed slightly in June. Nonetheless, while indicating consumer cautiousness about the economy overall, the data continued to be consistent with modest growth in spending for 2016.

Meanwhile, housing data out last week were mixed. On the positive side, existing home sales rose 1.8 percent, growing for the third straight month. Sales grew to 5.53 million units at the annual rate in May, up 4.5 percent over the past 12 months. Yet, new home sales declined 6.0 percent in May to 551,000 units. However, the data for the past two months were both stronger than March’s 522,000 sales pace, suggesting that demand for new homes has picked up overall, even with some easing in this report. Indeed, new home sales have risen 8.7 percent year-over-year, up from 507,000 in May 2015.

This week, we will look for signs of progress in the Institute for Supply Management’s Manufacturing PMI data. The May survey noted three consecutive months of expansion for the sector, serving as a positive indicator of improving demand and output for manufacturers, which have grappled with a number of challenges over the past year or so. The June report could extend that progress, or it could focus more on the ongoing challenges, much like the recent industrial production release. Regional sentiment surveys from the Dallas and Richmond Federal Reserve Banks will also provide some context on this issue. Other indicators of note out this week include the latest data on construction spending, consumer confidence, gross domestic product, the international trade of goods and personal income and spending.

P.S.: If you have not already done so, please take a moment to complete a survey that NAM is conducting on regulatory compliance. It will be part of a new project we hope to release this fall. This report will provide a narrative discussion about the slew of rules that impact businesses on a daily basis, essentially walking the reader through “a day in the life of an average regulated manufacturer.”

To complete the survey, click here, or if you could, please forward to an individual in your company who might be better able to respond to how your company complies with regulations. Responses are due by Thursday, June 30. As always, all responses are anonymous.